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The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) is an economic agreement between the government of Hong Kong and the Central People's Government of the People's Republic of China. Signed on June 29, 2003, it is a free trade agreement that allows qualifying products, companies and residents of Hong Kong preferential access to the mainland Chinese market.

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CEPA

Cepa not a big success story for many Guangdong enterprises

For many Guangdong enterprises, Cepa has failed to bring the expected economic benefits

For many Guangdong enterprises, Cepa has failed to bring the expected economic benefits.

Guangdong was expected to be the biggest mainland beneficiary of the Closer Economic Partnership Arrangement when it was launched a decade ago.

The popular belief was that Hong Kong capital and professional expertise would help upgrade the neighbouring province's service and financial sectors, improve its industrial infrastructure and support manufacturing, keeping the Pearl River Delta at the forefront of the nation's economic reform.

Ten years on, industry insiders say things have not quite worked out as planned.

Little data is available on the impact of Cepa in the province, but Guangdong's service sector is seen as the industry to offer clues to the agreement's effectiveness.

Figures from the provincial Department of Foreign Trade and Economic Co-operation show that more than 43 per cent of non-mainland investment in Guangdong's service sector last year came from Hong Kong, up 17 percentage points on 2003.

Between 2004 and last year, Hong Kong investors had 18,366 projects in the service industries approved by provincial authorities, with a total investment of some US$58.5 billion.

"There's no doubt Cepa has helped improve the 'software' of Guangdong's commerce and trade service industry, from company management, travel and medical care to education and logistics," said Professor Chen Guanghan , director of the Centre for Studies of Hong Kong, Macau and the Pearl River Delta at Sun Yat-sen University. "But we should admit that the actual effect of Cepa on the economy of Guangdong is not as good as we thought it would be."

"It remains inconvenient for Hong Kong capital and professionals to get into banking, hospitals, nursing and accounting industries under Cepa.

Regional barriers of local protectionism and red tape are still stubborn in Guangdong's government departments and industries."

Between 2004 and 2007, many Guangdong enterprises set up trading companies in Hong Kong, hoping to use Cepa to benefit from the city's trade-friendly environment. Most closed after seeing little benefit.

"I set up a trading company in Hong Kong in 2005 and contracted production to the mainland, said Li Zhiguang, who has garment factories in Guangzhou and Dongguan . "Many export-oriented factories did the same as we thought we could enjoy Hong Kong's efficient policies and preferential duties. Besides, owning a Hong-Kong-based company could have helped us strengthen our influence in overseas markets since consumers trusted the 'Hong Kong' mark.

"I closed it about one year later because the cost to run a company in Hong Kong was too high. And support and profit from Cepa and the Hong Kong government was also not as good as I expected.

"Now makers of shoes, clothing, textiles, furniture and toys are losing steam in overseas markets but pin their hope on the domestic market. Cepa means less and less to me."

Chen says as its manufacturing sector slides, Guangzhou is now looking to experimental development zones, which will be key drivers for the reform and development of the country's financial sector. He says Cepa has helped Guangdong lobby the central government for more favourable policies in setting up the new zones, which are blessed with more privileged opening-up policies in terms of both economics and administration.

"Actually, Shenzhen's Qianhai , Zhuhai's Hengqin and Guangzhou's Nansha New Area - the three main pilot zones endorsed by the central government - will be the greatest benefit from Cepa for Guangdong," Chen said. "With no Cepa, Guangdong would find it impossible to have such profitable pilot implementation measures."

Cepa has, experts say, helped the mainland in other ways.

Cepa was agreed on less than two years after Beijing joined the World Trade Organisation and at a time when China lacked free-trade agreements with other WTO countries. It has since signed 12 free-trade pacts, including a cross-strait deal between Beijing and Taiwan.

Liu Xueqin , a researcher at the Chinese Academy of International Trade and Economic Co-operation under the Ministry of Commerce, said: "I think Cepa has had its targeted impact. The signing of Cepa and supplementary agreements has sped up the integration of the economies of Hong Kong and the mainland, particularly Guangdong province," she said.

"Hong Kong companies have brought advanced business perspectives to the mainland's services industry, especially the financial sector, while the city has also had a great boost in trade, shipping and tourism from the mainland."

This article appeared in the South China Morning Post print edition as It just hasn't worked out as planned